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Thursday, December 14, 2006

GemsTV @ 1.40 ( TV Retail / Singapore ) 4 comments

Final Poll Results: 6:4

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Expensive valuation, in particular P/NTA

2. Growth in UK might slow

3. Expansion in new markets may only bear fruit after some time

This is one of the biggest IPOs of 2006, raising >S$200M in its offering. It is quite amazing that just two years back it was loss-making and just one year back its revenue was just < US$40M and with net profit US$5M, comparable to a bigger SESDAQ or a small Mainboard stock.

At the current price the stock is trading at ~35X FY06 PE and 5.5X P/NTA. Note that excluding IPO proceeds, NTA would only be about $0.06/share. The IPO managers must be applauded for coaxing so much money out of the IPO investors, whom to be fair are mainly institutions who probably know better.

It is clear that investors buying in are doing so because of the phenomenal growth story of GemsTV in the UK in a short period with limited resources, suggesting that the business model is asset-light and could possibly be very scaleable and transportable to other countries with mature home shopping markets, in particular the US. Who am I to say that this is doubtful?

Let's start with an examination of the growth momentum in GemsTV's core market, the UK; if growth is intact there is still something to fall back on should expansion into new markets, as planned for in the IPO, be less than satisfactory.

First, we put the growth of GemsTV UK into perspective based on information provided in the IPO. GemsTV launched its first GemsTV channel in the UK, in partnership with Eagle Road Studio, in October 2004, which means for FY05 the TV revenue segment was relevant for only 8 months (excluding sales to third-party networks which I assume were not important). As Eagle Studio revenues were not consolidated, one can only work out the total value of GemsTV jewellery products sold via this channel by examining its segmental sales. In FY05 Europe (interpret UK) segmental sales was US$28M, which is probably mainly to Eagle Studio which then resells it through its TV channel. If we assume a 100% markup by Eagle Studio, a reasonable assumption looking at the kind of gross margins GemsTV made in FY06 on consolidation of Eagle Studio, total TV sales of GemsTV jewellery in FY05 was probably ~US$50M (conservatively). Annualise that and FY05 TV sales would probably be US$75M. That is pretty impressive. At the same time, it makes for more realistic comparison with FY06 revenue of US$128M; revenue growth is ~70%, still impressive of course but clearly not the fourfold increase on FY05 that the IPO figures seem to suggest.

Additionally, if we assume FY05 profits were primarily from TV sales (FY04 bottomline was marginal without it) then overall annualised pre-tax profit, including the value-add from Eagle Studio, would be US$7.56M/40% X 12/8 = US$29M, where US$7.56M was the pre-tax profit earned by GemsTV in a 40-60 profit sharing arrangement (hence the division above by 40%) with Eagle Studio before the latter was acquired by GemsTV, annualised to ease comparison for 8 months' of operation in FY05 compared versus a full year in FY06, where pre-tax profit was US$42M. Again, FY06 profit growth over re-cast FY05 profit figures was still great (~35-40% growth) but not overwhelmingly so compared to the IPO prospectus representation.

The purpose in all this is to describe the probable trend of GemsTV prospects in the UK, its core market. The way in which revenue ramped up upon launch was quite phenomenal, and my guess is that the novelty aspects of it as well as the vaunted reverse auction system and game format were probably very interesting to the main customers --- idle housewives all over the UK. The revenues and profits from the UK TV sales were much higher than that suggested by GemsTV's IPO figures for FY05, due to lack of contribution from Eagle Studio. When the latter was bought over and revenues/profits consolidated, FY06 revenue and profit shot up. But perhaps the UK growth might be nearing maturity. If one examines the most recent 1Q07 figures, despite GemsTV's claims of good weather causing the relatively poor revenue performance (potential viewers all enjoying the sunshine outside), the fact is that profit margins had continued to drop. In the same statement, the company said "mild weather in the UK continued into Q2 FY2007" and that "continued competition from The Jewelry Channel, one of our major competitors in UK which was launched at the end of the last financial year, may also affect our future revenue in the UK". That in itself is ominous.

No wonder that GemsTV is looking to venture into new markets. A negligible amount is earmarked for upgrading of facilities in the UK market; ~40% is to be spent on expanding into the US and another 20% on entering the China and Japan markets. It could very well succeed if it manages to gain a foothold; after all it has a track record of ramping up so rapidly in the UK from what was basically nothing (which is why people are buying into it --- and these are not stupid investors).

It might depend on the risk appetite of the investor and his investing horizon. If the investor is willing to take a chance, GemsTV could be huge if it succeeds in the US whose home shopping market is about 2.5X that of the UK. And it is not unreasonable given that GemsTV has already succeeded in another country (UK) with a similar culture. The 35X PE could easily be whittled down if it succeeds in breaking the US market alone.

Being more valuation-focused, I myself am not inclined towards such stocks given the low NTA backing. Besides, near-term, one should not expect huge contributions from new markets. Given that the US operations, through DirecTV, only came onstream in late November 06, it may not be in time to catch the Christmas shopping season that defines the year for many American retailers (just look at Osim's Brookstone); this means that the investor has to be rather patient if he wants to see the rewards of any market expansion (say one year down the road .... too long for me). In the meantime, one really has to rely on gut feel to size up GemsTV's progress in the new markets.

At the same time, everybody knows about the weakening US consumption market now. Consumer sentiment is faltering. Jewellery is highly discretionary expenditure. It may not facilitate a smooth market entry.

Poll(please vote)
I agree that GemsTV is a hot-stock-not: Yes/No




Blogger Niversphere said...

I agree GemsTV is a hotstocknot. Nice article. =)

12/15/2006 1:18 AM  
Anonymous Anonymous said...

good article. you might consider also that the (rising) price of gold affects jewellery sales adversely and by extension, companies that operate in the jewellery sector.

12/18/2006 9:28 AM  
Anonymous Anonymous said...

The UK market for TVHS is changing cramatically and is much more fragile than at any time in the past because:

40+ shop channels have been placed by Sky in a seperate EPG category so sales have plummeted as traffic has fallen off.

Freeview, the digital terrestrial system is now more popular than Sky TV the digital satellite company.

So many channels, several selling just jewellery, on Sky means so much competition.

Jewellery competition in TV in US is intense.

Commodity price pressure has created havoc with prices and revenues/margins in the TVHS world wide.

The price drop format is a gimmick and after a while the savy US consuemr will catch on and probably be repulsed.

Quality of product may also be an issue.

And convergence with the internet, competition from the internet are two major disturbances that every TVHS channel will be confronting and will have a difficult time with.

12/22/2007 7:06 PM  
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8/09/2010 2:03 PM  

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